5 May 2017 | By Igor Boldyrev Community

Innovation in emerging markets

Developed-market companies seeking opportunities in emerging markets can learn most from local innovators

After a decade of strong growth, the past two years have been challenging for companies that want to make their mark in emerging markets. Eighty per cent of the world’s population lives in these markets, which are growing economically - some faster than others - with greater headroom than developed markets in terms of future growth potential. Local businesses on the ground are building support and a customer base through innovation, creating even more competition for multinationals, which continue to grapple with the challenge of appealing to potential customers in the developed world. 

Emerging market companies are setting the example for others to follow

But there are new opportunities opening up for multinationals in emerging markets. The key to unlock these opportunities is innovation. Too often, companies in mature markets that decide to expand internationally try to capture growth by exporting business models from the developed world to emerging markets. This model has been overused and is often unsuccessful. It ignores the unique challenges and customers that define these markets. In fact, roles are now being reversed - emerging market companies are setting the example for others to follow, outperforming and outgrowing their competitors in the developed world.

Local knowledge

The most noteworthy innovations in emerging markets are coming from businesses that have grown primarily in that particular market, and are able to take advantage of a deep local understanding. The mobile banking space is an area acutely experiencing these trends – exemplified by Kenya’s M-Pesa, a mobile money-transfer, financing and micro-financing service, which started by serving emerging markets. It now processes 25 per cent of Kenya’s GDP via text message, bypassing conventional banks, which has led to its rapid expansion.

Developed-world multinationals do not just face local innovators, but increasingly emerging-market multinationals

Similarly, Kotak Mahindra, India’s fourth-largest private-sector bank, has launched Jifi, a bank account that integrates social media platforms. Customers can open a Jifi account by signing up via Facebook or email, with account updates received via a direct message to their Twitter handle and loyalty points accrued based on Facebook “likes”.

Developed-world multinationals do not just face local innovators like M-Pesa and Kotak Mahindra, but increasingly are falling behind emerging-market multinationals. Around seven years ago, “reverse innovation” was the trend. The expectation was that large, developed multinationals would use product innovation in emerging markets to cement their positions in the developed world, taking the cost efficiencies required by emerging market consumers to the rest of the product-development capability and supply chain. In practice, the reverse has happened. Emerging-market multinationals also know how to operate in other emerging markets, giving them a competitive advantage against mature market businesses.

The Chinese firm Haier is a good example of learning from one market and applying it to another, while embracing a concept of “open innovation". Haier's approach allows customers, suppliers, entrepreneurs and other stakeholders to initiate and collaborate on product innovation. It began by targeting people who lived in small Shanghai apartments with bespoke products, and extended this to the US and other developed markets to meet the needs of modern, space-poor and cost-conscious customers.

The advantages of experience

But it is not all doom and gloom for multinationals in the developed world, and the opportunities are there for companies focused on innovation in three specific areas.    

The first is capability. Larger developed multinationals may be slower-moving, but they have established structures and ways of working which can be replicated and tailored. EY’s survey of emerging market chief finance officers indicated greater collaboration with chief marketing officers, for example, focusing on areas traditionally outside the finance function, such as return on investment from marketing and customer insight. Large organisations do not have the same agility and culture of innovation, but they are ahead in processes and internal capability.  

Multinationals are far behind in building innovation based on disruptive, future technologies

Secondly, they can think cross-sector. Banco Bradesco in Brazil is working with Ford Motor Company to equip cars with its banking applications. And, as the success of M-Pesa shows, mobile financial services is a sector ripe for global innovation. Across emerging markets, EY has identified 251 live and 102 planned launches of mobile banking services for the “unbanked”, of which only 85 are financial-service company initiatives. Capturing these customers also draws on cross-sector innovation. Behavioural scoring tools based on mobile phone activity provide valuable information on potential customers. GPS tracking, for example, can show regular movement along the same route, signalling a commute to and from work. GPS can also show travel either for work or leisure, which can indicate a stable job or disposable income. GPS is one example of many behavioural tools allowing customers to access credit quickly, and banks to assess their creditworthiness.

Finally, companies can draw on their advantage in other emerging technologies to steal a march. According to Anil Gupta, chair in strategy, globalisation and entrepreneurship at the University of Maryland, “Multinationals are far behind in building innovation based on disruptive, future technologies”.   

The path is clear for companies that want to succeed in the dynamic, fast-changing emerging market where massive, yet hard-to-predict upheavals are expected. They must innovate and adapt to succeed while successfully balancing how to operate in and navigate in a possibly volatile environment. Companies in that recognise the potential impact of new technologies -such as block chain, robotics, artificial intelligence and virtual reality - and invest in them for emerging markets will be far better positioned across all markets, emerging or developed. 

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